Two Separate agreements for share transfer & Non-Compete not Sham – SC
IN THE SUPREME COURT OF INDIA
The Relevant Text of the as Order follows :
17. We may only reiterate as correctly found by the majority judgments of the Appellate Tribunal, that:
(i) A share of the face value of INR 10 and the market value of INR 3 was sold for INR 30 as a result of the control premium having to be paid.
(ii) It is important to note that each member of the family was paid for his/her shares in the company, the lion’s share being paid to the assessee’s son and wife as they held the most number of shares within the said family.
(iii) The non-compete fee of INR 6.6 crores was paid only to the assessee. This was for the reason stated in the Deed of Covenant, namely, that Shri Shiv Raj Gupta had acquired considerable knowledge, skill, expertise and specialization in the liquor business. There is no doubt that on facts he has been Chairman and Managing Director of CDBL for a period of about 35 years; that he also owned a concern, namely M/s Maltings Ltd., which manufactured and sold IMFL and beer and that he was the President of All India Distilleries Association and H.P. Distilleries Association.
(iv) It is further recorded in the judgment of the Accounting Member that the amount of INR 6.6 crores was arrived at as a result of negotiations between the SWC group and the appellant.
(v) That the restrictive covenant for a period of 10 years resulted in the payment of INR 66 lakhs per year so that the appellant “…will not start or engage himself, directly or indirectly, or provide any service, assistance or support of any nature, whatsoever, to or in relation to the manufacturing, dealing and supplying or marketing of IMFL and/or Beer.” Given the personal expertise of the assessee, the perception of the SWC group was that Shri Gupta could either start a rival business or engage himself in a rival business, which would include manufacturing and marketing of IMFL and Beer at which he was an old hand, having experience of 35 years.
(vi) As was correctly held by the second Judicial Member, it was also clear that the withholding of INR 3 crores out of INR 6.6 crores for a period of two years by way of a public deposit with the SWC group for the purpose of deduction of any loss on account of any breach of the MoU, was akin to a penalty clause, making it clear thereby that there was no colorable device involved in having two separate agreements for two entirely separate and distinct purposes.
18. The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other. For example, stating that there was no rationale behind the payment of INR 6.6 crores and that the assessee was not a probable or perceptible threat or competitor to the SWC group is the perception of the Assessing Officer, which cannot take the place of business reality from the point of view of the assessee, as has been pointed out by us hereinabove.
The fact that M/s Maltings Ltd. had incurred a loss in the previous year is again neither here nor there. It may in the future be a direct threat to the SWC group and may turn around and make profits in future years. Besides, M/s Maltings Ltd. is only one concern of the assessee – it is the assessee’s expertise in this field on all counts that was the threat perception of the SWC group which cannot be second-guessed by the revenue.
Equally the fact that there was no penalty clause for violation of the Deed of Covenant, has been found by us to be incorrect given the letter dated 02.04.1994. The fact that the respondent-assessee in his letter dated 26.03.1998 in reply to the show-cause notice had stated that the SWC group had gained a substantial commercial advantage by the purchase of shares in CDBL as the turnover increased from INR 9.79 crores in the accounting period ending 31.03.1991 to INR 45.17 crores in the accounting period ending 31.03.1997 is again neither here nor there.
As a matter of fact, the SWC group, due to its own advertisement and marketing efforts, may well have reached this figure after a period of six years (the date 30.09.1995 is wrongly recorded by the High Court in paragraph 19 – the correct date as per the letter dated 26.03.1998 is 31.03.1991, as has been pointed out by us hereinabove).
19. It only remains for us to point out the judgment in Guffic Chem (P) Ltd. v. CIT (2011) 4 SCC 254. In this case, the question set out by the Court is as follows:
“Whether a payment under an agreement not to compete (negative covenant agreement) is a capital receipt or a revenue receipt is the question which arises for determination in this case?”
Here, the Court was dealing with an amount of INR 50 lakhs received by the appellant-assessee from Ranbaxy as a non-compete fee under an agreement dated 31.03.1997. This Court in negating the application of Section 28(ii)(a) to such receipt, held as follows:
“Decision
4. The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt.
5. The above dichotomy is clearly spelled out in the judgment of this Court in Gillanders case [(1964) 53 ITR 283 (SC)], in which the facts were as follows: the assessee, in that case, carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account.
Under an agreement that was terminable at will, the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency of the appellant and in addition in the third year full commission was paid for the sales in that year. Imperial Chemical Industries (Export) Ltd. took a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives.
6. Two questions arose for determination in Gillander’s case [(1964) 53 ITR 283 (SC)], namely, whether the amounts received by the appellant for loss of agency were in the normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt.
7. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillander’s case [(1964) 53 ITR 283 (SC)]. In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by CIT (A) and the Tribunal.
8. One more aspect needs to be highlighted. The payment received as a non-competition fee under a negative covenant was always treated as a capital receipt till Assessment Year 2003-2004. It is only vided the Finance Act, 2002 with effect from 1-4-2003 that the said capital receipt is now made taxable [see Section 28(v-a)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act.
It became taxable only with effect from 1-4-2003. It is well settled that liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vides Section 28(v-a) and that too with effect from 1-4-2003. Hence, the said Section 28(v-a) is amendatory and not clarificatory.
9. Lastly, in CIT v. Rai Bahadur Jairam Valji [(1959) 35 ITR 148 (SC)] it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT(A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to the loss of a source of business; that payment was received under the negative covenant and therefore the receipt of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under the non-competition agreement with effect from 1-4-2003.”
20. Respectfully following the aforesaid decision, we allow the appeal and set aside the impugned judgment for all the reasons given by us above. All pending applications, if any, stand disposed of in terms of the judgment.
Tags : Judgement, Supreme Court
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